The New Regulatory Financial Framework – The Financial Services Act 2012

The 1st April 2013 saw the passing of the Financial Services Act 2012. This contained the reforms implemented by the UK government covering the regulatory structure of the UK’s financial services and created a brand new framework for managing and supervising the financial services and banking industry within the UK. The 2012 Act also gave the Bank of England the responsibility of overseeing the financial system with the remit of supervising financial service firms on a day to day basis to manage any significant balance sheet risks.

The Act formed three new bodies – The FPC (Financial Policy Committee), the PRA (Prudential Regulation Authority) and the FCA (Financial Conduct Authority). The Act primarily contained core provisions for structural reform with extensive changes being made to the FSMA (Financial Services and Markets Act 2000), the Banking Act 2009 and the Bank of England Act 1998, however it also contained a number of miscellaneous changes to the existing legislation such as provision to enable the government to transfer the regulation of consumer credit to the FCA from the OFT and to ensure that all fines paid to regulators by the financial services industry would immediately go to the Exchequer instead of being used to reduce the amount of annual levy being imposed on the other financial institutions.

The New Regulatory Structures

The Act established the FPC and made it responsible for all macro-prudential regulation. It was also charged with the task of monitoring the resilience and stability of the entire financial system of the UK, supporting governmental economic policies and monitoring, identifying, removing and reducing any systemic risks. The FPC was also given the power to direct the FCA and PRA in all macro-prudential matters as well as to make recommendations to the FCA, PRA and Bank of England and to prepare reports regarding financial stability.

The PRA was created as the micro-prudential regulatory authority with responsibility for ensuring that insurers, deposit takers and some significant investment companies are effectively prudentially regulated. The objective of this body was to promote the soundness and safety of firms by attempting to avoid any adverse effect on financial stability and trying to minimise any adverse effects that could result from any disruption to financial services continuity caused by the failure of businesses.

The FCA replaced the abolished FSA and was charged with the objective of making sure of the optimal functioning of relevant markets. There were 3 operational objectives given to the FCA – to ensure consumers are appropriately protected, to enhance and protect the UK financial system’s integrity and to promote competition in the consumer interest in regulated financial services markets. The FCA were also required to discharge its functions in such a manner as to promote competition in the consumer interest.

The Two New Handbooks

The FSA handbook which was in existence before the Act was split up into two new ones, one for the PRA and the other for the FCA. Several consultation papers were published by the FSA outlining the changes which had been proposed relating to the setting up of new rulebooks for the PRA and FCA. Some of these proposed amendments included:

·         Changes to the Listing Rules sourcebook that arose from the statutory powers which were granted to the FCA to discipline and supervise sponsors

·         Amendments to the DTR (Disclosure and Transparency Rules sourcebook) with regard to the approval, obligations and supervision of primary information providers

·         Changes to the Recognised Investment Exchanges and Recognised Clearing House and  sourcebook

·         Changes to the Decision Procedure and Penalties Manual which arose from the FCA’s newly acquired statutory notice powers.

·         Changes to certain provisions contained in the existing FSA Enforcement Guide

The amendments that were proposed in these consultation papers were intended to take effect as of the 1st April 2013.

The Order Implementing the Financial Services Act

The Financial Services Act 2012 took effect on the 1st April 2013 and was implemented via secondary legislation. Before the official passing of the act on this date, two statutory instruments that relating to the Act were released. These included:

·         The Financial Services Act 2012 (Transitional Provisions) (Rules and Miscellaneous Provisions) Order 2013, which was made on the 29th January 2013. This set out certain provisions for transition to help facilitate the Act’s approaching enforcement

·         The Financial Services Act 2012 (Commencement No. 1) Order 2013 which was made on 23rd January 2013. This was the first commencement order which brought some of the Act’s provisions into force.

What Can be Concluded From the Act?

Some of the most interesting changes that were put in place through the government’s reform of the regulatory structure of the UK’s financial services industry following the passing of the Financial Services Act 2012 were those with relation to the FCA. The creation of this body has popularly been viewed as a chance to reset the financial services industry’s conduct standards that had long been under scrutiny since the 2008 financial crisis had begun. A new focus was brought about that required firms to put their customer’s well being at the centre of their business’ operation at every point from the boardroom right up to the point of sale. At the same time, there was also a strong new drive put in place with the aim of promoting attitudes, motivations and behaviour across the whole financial services industry that focused on good conduct above and beyond all other issues. The powers that were given to the FCA through the passing of the Financial Services Act 2012, including the banning of certain financial products, the publishing of details regarding financial promotions that have been proven to be misleading, and the publishing of details about the taking of disciplinary action, all allowed the FCA to act more quickly and to make moves to step in whenever a problem had been identified that could risk financial harm either to the markets or to the consumers themselves.